While foreign companies are increasingly inclined to outsource legal work, Indian businesses are beefing up their in-house legal teams
In 2009 the legal department at Rio Tinto, a leading mining and exploration company, began outsourcing some of its work to CPA Global, a legal process outsourcing (LPO) company. Under pressure to rein in legal costs, Rio Tinto, which has its headquarters in London, estimated that using CPA Global’s team of lawyers in India for routine work would reduce its annual legal spending by 20%.
LPO was relatively untested in 2009 and sending legal work overseas was seen as risky. But Rio Tinto pressed on, firm in its belief that it didn’t “need to pay hundreds of pounds for something that shouldn’t cost that much”, as Leah Cooper, then the company’s managing attorney, reportedly said. Cooper added that Rio Tinto had “no choice” but to go elsewhere until law firms “fix their cost structures”.
Today Rio Tinto is just one of the many companies that use the services of LPO companies. Other global companies that do so include Nokia, Sony, Philip Morris and Deutsche Bank.
Indian companies face similar pressures to maximize the value of their legal spending. RSG Consulting, a London-based legal research company, estimates that in 2011 legal spending at India’s top 100 companies stood at US$555 million. The figure is expected to touch US$1billion by 2014.
However, companies in India have not gone down the LPO route. Instead, over the past few years, many of the larger companies have built up substantial in-house legal teams and moved to what Samuel Mani Kallupurakal, head of legal at Infosys, calls the “law firm within a company model”.
As a result, small armies of lawyers work within companies to ensure that a plethora of matters are handled in-house. Companies with a legal team will typically handle everything except high-stakes litigation and aspects of international M&A transactions that involve a jurisdiction where they have no expertise.
Vijaya Sampath, legal adviser to the chairman and group CEO at Bharti Enterprises, confirms that Bharti has the “depth in-house to handle matters relating to Indian law”. The company uses external expertise only if it needs a legal opinion on a specific matter or in the course of litigation and international M&A.
The same is true for the Tata group, where Sidharth Sharma, an in-house counsel at Tatas’ Group Legal Department, says “a substantial chunk of the work is done in-house”.
At ICICI Bank, which has one of the largest in-house teams in India, only 10% to 20% of the work is outsourced to law firms. Speaking in 2010, Pramod Rao, head of legal at ICICI said the 400-strong in-house team was “seen as cutting edge” in terms of the unprecedented financing and project work that it did and also as the “conscience keepers” of the organization.
ICICI Bank is India’s largest private bank and has assets of over US$110 billion. Its in-house legal team provides services for its subsidiary companies and also its corporate clients. Rao has been part of the legal team for over 15 years and is soon to be replaced by Sanker Parameswaran who is currently senior director, legal, and company secretary at ICICI Venture Funds Management (see News page 6).
Axis Bank is another private Indian bank with a strong legal team. It began operations in 1994 and currently has 1,600 branches and a team of 29 lawyers to service its needs. B Gopalakrishnan, president and head of legal at Axis Bank, says “we outsource very little except litigation”.
While it could be cheaper for a company to have lawyers on the payroll, cost considerations may be secondary. More importantly, the increasing complexity of the legal and regulatory landscape that expanding companies face makes it vital to have legal advisers with a keen understanding of the nuances of the business close at hand.
This is the case especially in sectors like banking and financial services, where as Abhimanyu Singh Poonia, the India general counsel at Bank of America Merrill Lynch, says, “a lot of change is happening in a very short time”.
“India is in a sprint mode rather than a marathon mode in terms of catching up,” says Poonia. He adds that this is typical of emerging markets and that over a period of time regulations should stabilize.
In the meanwhile companies have been taking on the fixed cost of a legal adviser, if they can afford to.
At Infosys, where Kallupurakal says 70% of legal spending is in-house, the development of legal expertise has been gradual. Infosys had only three lawyers in 2002. It began doing more of its own commercial transactional work after Kallupurakal joined the team, adding 20 lawyers between 2003 and 2007. As employment law issues grew more important, specialist lawyers were hired in international jurisdictions. Today, Infosys has a global team of around 50 lawyers.
“Over time we got better and better at the job,” says Kallupurakal. He adds that one of the key advantages of using captive legal expertise is that the lawyer involved with a transaction sees it through its entire life cycle and not merely during its initial stages. This adds to the business skills of the lawyer.
For the growing in-house fraternity, being part of the success or failure of a transaction has helped reinvent the image of the legal counsel, whose role is now seen as integral to the decision making process. Increasingly, the legal heads of companies report directly the chief operating officer or the CEO.
“There has been a paradigm shift in how in-house lawyers are viewed,” says Sampath, who was the general counsel at Bharti for nine years during which the company saw “huge amounts of exponential growth”.
Learning by osmosis
The transformation of the legal counsel into a key decision maker at some of India’s more progressive companies has also been the result of the growing interaction between Indian and Western companies, where the general counsel wields considerable clout.
“Companies that have an international bent have realized the need to have a centralized and strong legal function,” says Kallupurakal.
At international investment banks, the legal adviser has long played a vital role. Banks with offices in India have small teams of in-house lawyers and their interactions with Indian companies have made them the trend setters in this regard.
But here too perceptions surrounding the role of the in-house counsel appear to have changed. “The quantum of work has increased and as a result the in-house lawyer plays a more visible role,” says Sapan Gupta, legal head of debt capital markets for South Asia at Standard Chartered. He is one of a team of 10 in-house lawyers that service the needs of the wholesale banking function at the bank.
Poonia at Bank of America Merrill Lynch heads a team of seven lawyers. He says that the leadership team at the bank dedicates “a significant portion of time” to understanding changes in the regulations, which he and his team keep track of.
Driving a good deal
The bottom line is that the senior management needs to understand the legal issues and risks related to every transaction. But for the large numbers of mid-sized and small companies that cannot afford the fixed cost involved with maintaining an in-house legal adviser, the dependence on often expensive external counsel continues.
Strategies to maximize the value of legal spending vary, but most in-house lawyers agree that providing a written scope of work is vital.
“When seeking the opinion of external counsel, I prefer expressing my opinion in the query and my understanding … they may agree, disagree or they may modify the same,” says Gopalakrishnan at Axis Bank. He adds that he never sends out an open query.
Even if a relationship has been developed with an external lawyer or law firm, in-house lawyers also agree that it is important to fix fees before outsourcing work.
“We like certainty in fees,” says Kallupurakal, who remains wary of hourly billing rates, especially when there is a lot of discovery involved. His preference is for a two-phase fixed price deal: paying a law firm for its efforts and then, if the transaction is successful, paying a success fee.
Most in-house lawyers say that achieving certainty in fees may be difficult when they hire an external counsel for litigation. In such a situation while Poonia at Bank of America Merrill Lynch says “it is difficult to gauge what the legal spend would be”, he points out that it is possible to set a budget for the litigation in consultation with the law firm that is involved.
“Most of the time people have a fair idea as to what the cost would be,” says Poonia. He adds that his bank gets a preferred rate on the hourly rate and, as they work with a few law firms, they also get discounted rates.
At investment banks where the cost of hiring external legal advice is often embedded in the transaction cost of individual deals, external help may be sought on a “friendly basis” while the structuring of the deal is being finalized. “What is new here is that law firms are much more open to providing such advice without a fee,” says Gupta. “Earlier I would get asked ‘are we getting paid?’.”
Despite the lure of wielding power in this manner, the legal heads of companies face great challenges in attracting talented lawyers, most of whom gravitate towards better paying jobs at one of India’s leading law firms.
Finding the right person for an in-house team is complicated by the fact that companies look for lawyers who are “not just pure lawyers”, as Poonia describes it. They need people who understand the intricacies of their business. Poonia believes this is especially challenging for banks and financial services companies.
“You cannot be a lawyer in an investment bank if you don’t understand markets … how they function, what is the business rationale,” says Poonia.
As the pool of experienced in-house lawyers is limited companies looking to set up or strengthen legal departments often resort to poaching experienced people from their competitors. “We have an extensive alumni network,” says Kallupurakal.
But all of this could change as the market matures and becomes more broad based. Not only are large numbers of young in-house lawyers working their way through the system, but as India’s 900 law schools produce large numbers of lawyers each year, the opportunities for companies to hire high-quality graduates are increasing.
Sharma at Tata Group says a major attraction is the considerable responsibility that comes with the job quite early on. He believes that working in-house has enabled him to work in a wide area of the law, compared with a lawyer at a law firm, who might only see a particular area of the law.
“My job requires me to be equally adept at handling a joint venture transaction and dealing with important litigation or arbitration related matters,” says Sharma. “An in-house lawyer needs to have a general knack of lawyering … one needs to be aware of a broad spectrum of laws rather than being a super specialist in just one area.”
Sampath at Bharti observes that providing appropriate training for in-house lawyers presents a challenge to the legal head of a company. “How do we train our lawyers in terms of what we need?” she asks.
Maintaining a balance
The demands on a company’s legal team are many and while in-house lawyers may have moved closer to the boardroom, their role as the “conscience keepers” of the company requires them to maintain a distance.
“We assist the business department but that does not mean that we have to don the mask of the business department and say everything is correct,” says Gopalakrishnan at Axis Bank.